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No. of Recommendations: 15
Response to Eric's post which received 44 recommendations -- any cheerleading on this board? :-)

Ok, my hybrid Finnish-Canadian friend, I'll make this quick. Suppose there's a billion phones sold by the end of 2004 (your company's estimate). . . So with one billion phones out there, Americans getting an HDR/cdma2000 high, and Europe and Asia buying W-CDMA/GSM dual-modes en masse, it's safe to assume that 60% of those billion phones will be CDMA.

Why is it safe to assume that 60% of those phones will be CDMA? There will be competing standards that will be open-source (free). I will concede that it is possible if not likely that CDMA will be a dominant standard – but “safe to assume” it just isn't.

Out of those 600 million phones, let's assume Qualcomm provides chips for 90% of them at a $20 ASP with a 50% margin. With a 40% tax rate, that's $6 in profit per chip, or $3.28 billion overall. Now let's assume they get a 4% royalty on these 600 million phones, with the phones having an ASP of $200.

An ASP of $200 on these 600 million phones is COMPLETELY unreasonable. Think of it this way, not many people TODAY in the US (the richest country in the world) pay more than $200 for their phone. Now, SOME of these 600 million phones have to come from countries that are far poorer than the US. In fact, this estimate calls for 18% of the world's population to purchase a phone in the year 2004 alone. If 18% of the world is going to buy a phone, the phones are not going to have an ASP of $200. It defies reason.

I really think that ASPs will start taking off next year as consumers start getting a whiff of things such as Bluetooth, color displays, speech-recognition, high-speed flash memory, full-fledged PDA functions on operating systems such as the Palm OS and Epoc, streaming video, and MP3 playback. Keep in mind that ASPs for PCs haven't always been falling.

Probably true for the high-end. However, the majority of the 600 million people purchasing a phone or phone/PDA/computer hybrid will necessarily have to purchase low-end phones.

When users were hard-pressed to get their computers to run the latest software, demand for high-end boxes, and thus ASPs, actually increased.

Sorry to bring up facts, but the ASPs for computers have come down significantly over the past 10 years – even at the high end. I recall thumbing through mags ten years ago and seeing new systems for 3-4k:

I expect the same thing to happen in the cell phone industry for a few years. But for now I'll assume that it stays at $200 or so. So that's $4.80 in post-tax profit on those 600 million phones, which translates into another $2.88 billion in profit.

True for the high end. But again, the Average (that's the A in ASP) phone must be cheap for the majority of people to afford.

So Qualcomm gets $6.16 billion in profits just from these divisions. I'll assume that they get another $344 million in profit from implementing CDMA chips in cars, and standalone HDR chips in PDAs, PCs, and laptops (given how bureaucratic cable and phone companies are, and how they require in-home installation, HDR could become a serious last mile threat), SnapTrack's software, Eudora, Omnitracks, Digital Cinema, and Wireless Knowledge. So that's $6.5 billion in profit using conservative estimates.

Conservative! GASP!!! What's your best-case scenario look like? A $500 ASPs with 90% of 2 billion hand sets sold in a single year?!??!?

At 80x earnings, this would make Qualcomm a valuation of $520 billion, an increase of 688% from here. Of course, give Qualcomm a Cisco-like multiple on those earnings, and it becomes a whole other story.

Why stop at 80X earnings? Why not just go for 200X or (as long as we're dreaming) 500X? Isn't it possible that “Cisco-like” multiples in 2004 are 15X or 30X?
Justification for 80X earnings comes with a high projected growth rate. When you are already selling to 18% of the world's population in a given year, how great can your growth rate be?

However, as these estimates show, if all goes well for the company, Qualcomm could also bring investors a much higher return than Nokia over the next few years.

May be true. However, it's FAR from a given.
By the way, QCOM supposedly sold off its handset division to “focus on its core business.” This seems like a mistake to me. QCOM will no longer be “prove the effectiveness of a new technology (like HDR - 3G or G4 if it ever comes)” without a handset division.
Moreover, if they are going to “focus on QCOMs core strategy of selling IP” then why invest $144 million in NetZero?

NetZero is GARBAGE! What would you rather own: A handset division, or NetZero?

Just goes to show that Jacobs isn't quite the Messiah – he is fallible.

I might even consider buying QCOM at these levels; but after looking at the chart, it looks like buying now is like trying to catch a falling knife. I would rather “wait and see” if QCOM forms a bottom and buy @ 90 if this really is a bottom. Otherwise, I may just pick some up later this year @ 40 or 50.


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